[Federal Register Volume 85, Number 170 (Tuesday, September 1, 2020)]
[Notices]
[Pages 54438-54451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19204]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89686; File No. SR-IEX-2019-15]


Self-Regulatory Organizations; Investors Exchange LLC; Order 
Approving a Proposed Rule Change To Add a New Discretionary Limit Order 
Type Called D-Limit

August 26, 2020.

I. Introduction

    On December 16, 2019, the Investors Exchange LLC (``IEX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a new order type, the 
Discretionary Limit order (``D-Limit''). The proposed rule change was 
published for comment in the Federal Register on December 30, 2019.\3\ 
On February 12, 2020, the Commission designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\4\ On March 27, 2020, the Commission instituted 
proceedings to determine whether to approve or disapprove the proposed 
rule change (``OIP'').\5\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 87814 (December 20, 
2019), 84 FR 71997 (``Notice''). Comments on the proposed rule 
change can be found at https://www.sec.gov/comments/sr-iex-2019-15/sriex201915.htm.
    \4\ See Securities Exchange Act Release No. 88186 (February 12, 
2020), 85 FR 9513 (February 19, 2020).
    \5\ See Securities Exchange Act Release No. 88501 (March 27, 
2020), 85 FR 18612 (April 2, 2020).
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II. Description of the Proposed Rule Change

A. Latency Arbitrage

    IEX explains that its proposal ``is designed to protect liquidity 
providers, institutional investors as well as market makers, from 
potential adverse selection by latency arbitrage trading strategies in 
a fair and nondiscriminatory manner. . . .'' \6\ IEX uses the term 
``latency arbitrage'' to refer to trading strategies that trade based 
on the market participant's ability to minimize latencies in seeing, 
and reacting to, quote and trade data through its use of low-latency 
systems and technology, as well as connectivity and proprietary market 
data it purchases from exchanges, which may allow them to react faster 
to changing market prices than other market participants who have not 
purchased those same low-latency systems, connectivity, and data 
sources, which can be relatively expensive.\7\
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    \6\ Notice, supra note 3, at 71998.
    \7\ See, e.g., Notice, supra note 3, at 72004 and IEX First 
Response to Comments, Letter from John Ramsay, Chief Market Policy 
Officer, IEX, dated February 13, 2020, at 2-3 (``IEX First Response 
to Comments'').
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B. IEX Speed Bump

    In the Notice, the Exchange explains how it has designed its market 
model around ``ways to counter or reduce speed advantages that can harm 
investors by exposing them to execution at stale prices when their 
orders are traded against by traders with more complete and timely 
information about market prices.'' \8\ The primary feature of that 
market model is the IEX ``speed bump,'' which employs physical path 
latency to introduce an equivalent 350 microseconds of latency between 
the network access point (the Point-of-Presence, or ``POP'') and the 
Exchange's system at its primary data center.\9\ The speed bump 
provides time for IEX to update pegged orders resting on its exchange 
when the national best bid and offer (``NBBO'') changes, so that the 
resting pegged orders are accurately pegged to current market 
prices.\10\ Without this protection, pegged orders resting on IEX have 
the potential to be subject to latency arbitrage (i.e., executed at 
disadvantageous ``stale'' prices because IEX has not yet been able to 
update the prices of those resting orders in response to changes in the 
NBBO) by those market participants that can rapidly aggregate market 
data feeds and react faster than IEX to NBBO updates.\11\ The IEX speed 
bump by itself currently provides no protection or benefits for 
displayed orders or non-displayed orders at fixed limit prices.\12\
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    \8\ See Notice, supra note 3, at 71998.
    \9\ See id. The IEX speed bump applies to all incoming and 
outgoing messages except for inbound market data from other trading 
centers and outbound transaction and quote information sent to the 
applicable securities information processor. In addition, updates to 
resting pegged orders on IEX are processed within the IEX trading 
system and do not require separate messages to be transmitted from 
outside the system.
    \10\ See, e.g., Securities Exchange Act Release No. 78101 (June 
17, 2016), 81 FR 41142, 41157 (June 23, 2016) (File No. 10-222) 
(granting the application of IEX for registration as a national 
securities exchange).
    \11\ See id.
    \12\ See id. at 41155.
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    The speed bump works together with several non-displayed order 
types on IEX that are ``pegged'' to a specified

[[Page 54439]]

price.\13\ These order types include the Discretionary Peg (``DPeg'') 
and the Primary Peg (``PPeg'').\14\ DPeg and PPeg orders can ``exercise 
discretion'' to trade at prices more aggressive (i.e., higher in the 
case of a peg order to buy, or lower in the case of a peg order to 
sell) than their default prices.\15\ Specifically, IEX uses a 
proprietary mathematical calculation, called the crumbling quote 
indicator (``CQI''), to determine when these pegged order types are 
eligible to ``exercise discretion.'' \16\ As described in the Notice, 
the CQI is designed to predict whether a particular quote is unstable 
or ``crumbling,'' meaning that the NBB likely is about to decline or 
the NBO likely is about to increase.\17\
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    \13\ See Notice, supra note 3, at 71998 (citing IEX Rule 
1.160(t)).
    \14\ See IEX Rule 11.190(b)(10) and 11.190(b)(8), respectively. 
DPegs are pegged to one minimum price variation, or ``tick,'' below 
the national best bid (``NBB''), in the case of buy orders, or one 
tick above the national best offer (``NBO''), in the case of sell 
orders, unless the submitter of the order has specified a limit 
price that is less aggressive than this default resting price. PPegs 
are pegged to one tick below the NBB, for a buy order, and one tick 
above the NBO, for a sell order, but is also available to trade at a 
price up to the NBB or down to the NBO, unless further restricted by 
the order's limit price.
    \15\ See Notice, supra note 3, at 71998.
    \16\ See id.
    \17\ See id.
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C. Crumbling Quote Indicator

    The Exchange utilizes real time relative quoting activity of 
certain Protected Quotations and a proprietary mathematical calculation 
(the ``quote instability calculation'') to assess the probability of an 
imminent change to the current Protected NBB to a lower price or 
Protected NBO to a higher price for a particular security (``quote 
instability factor'').\18\ When the quoting activity meets predefined 
criteria and the quote instability factor calculated is greater than 
the Exchange's defined quote instability threshold, IEX treats the 
quote as ``unstable,'' and the CQI is on at that price level for up to 
two milliseconds (hereafter referred to as the ``quote instability 
determination price level'' or the ``CQI Price'').\19\ During all other 
times, the quote is considered stable, and the CQI is off. When IEX 
determines, pursuant to the CQI methodology, that the current market 
for a specific security is unstable--meaning there is a heightened 
probability of an imminent quote change at the NBB or NBO--IEX's system 
will prevent DPeg and PPeg orders on that side of the market from 
exercising discretion and trading at a price that is more aggressive 
than the DPeg or PPeg order's resting price.\20\
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    \18\ See id. The CQI utilizes a fixed formula that is codified 
in IEX's rulebook and thus is publicly known. See IEX Rule 
11.190(g).
    \19\ See id. IEX assesses the stability of the Protected NBB and 
Protected NBO for each security.
    \20\ See id. The CQI is thus side specific.
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D. D-Limit Order Type

    In this proposal, IEX seeks to adopt the D-Limit order type, which 
would work in conjunction with the CQI by adjusting its limit price 
when the CQI is on.\21\ A D-Limit order could be a displayed or non-
displayed limit order that, upon entry and when posting to the IEX 
order book, is priced to be equal to and ranked at the order's limit 
price.\22\
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    \21\ IEX proposes to amend IEX Rule 11.190(b)(7), which is 
currently reserved, to add the D-Limit order type.
    \22\ A non-displayed D-Limit order with a limit price more 
aggressive than the midpoint of the NBBO (``Midpoint Price'') will 
be subject to the Midpoint Price Constraint and be booked and ranked 
on the order book at a price equal to the Midpoint Price pursuant to 
IEX Rule 11.190(h)(2).
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    Most notably, a D-Limit order (including a displayed D-Limit order) 
would be adjusted to a less aggressive price during periods of quote 
instability when the CQI is on. Specifically, if, upon entry of a D-
Limit buy (sell) order, the CQI is on and the order has a limit price 
equal to or higher (lower) than the quote instability determination 
price level (i.e., the CQI Price), IEX will automatically adjust the 
price of the D-Limit order to one minimum price variant (``MPV'') \23\ 
lower (higher) than the CQI price. Similarly, when unexecuted shares of 
a D-Limit buy (sell) order are posted to the order book, if a quote 
instability determination is made and such shares are ranked and 
displayed (in the case of a displayed order) by IEX at a price equal to 
or higher (lower) than the CQI Price, IEX will automatically adjust the 
price of the resting D-Limit order to one MPV lower (higher) than the 
CQI Price.\24\
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    \23\ See IEX Rule 11.210 (specifying a MPV of $0.01 for bids and 
offers priced equal to or greater than $1.00 per share).
    \24\ In the Notice, the Exchange provides examples of how D-
Limit would operate. See Notice, supra note 3, at 72000-01.
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    When the price of a D-Limit order is adjusted, the order will 
receive a new time priority. If multiple D-Limit orders are adjusted at 
the same time, IEX will maintain their relative time priority. Further, 
when the price of a D-Limit order is adjusted, the member that entered 
the order will receive an order message from the Exchange notifying the 
member of the price adjustment.
    A D-Limit order whose price is adjusted by IEX will not revert back 
to the price at which it was previously ranked and, in the case of a 
displayed order, displayed. Rather, the order will continue to be 
ranked and, in the case of a displayed order, displayed at the new 
price, unless the order becomes subject to another automatic adjustment 
or if the order is subject to the price sliding provisions of IEX Rule 
11.190(h).\25\
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    \25\ IEX Rule 11.190(h) provides for price sliding in the event 
of a locked or crossed market, to enforce the Midpoint Price 
Constraint, to comply with the display or execution requirements for 
a short sale order not marked short exempt during a Short Sale 
Period, or to comply with the Limit Up-Limit Down Price Constraint. 
As set forth in IEX Rule 11.190(h), an order that has been subject 
to price sliding will be repriced back to its more aggressive limit 
price when the market condition changes such that the condition 
necessitating the price sliding is no longer applicable. This is in 
contrast to the normal operation of a D-Limit order when it adjusts 
due to the CQI being triggered, at which point the D-Limit order's 
adjusted price will not reprice.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\26\ In particular, the Commission finds that the 
proposed rule change is consistent with Sections 6(b)(5) of the 
Exchange Act,\27\ which requires, among other things, that the rules of 
a national securities exchange be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest, and not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers, and 6(b)(8) of the Exchange Act,\28\ which 
requires that the rules of a national securities exchange not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). The Commission 
addresses comments about competition below in Section III.E.
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
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    As outlined below, the Commission has carefully reviewed the 
proposed rule change, comments received, and IEX's response to comments 
to arrive at these findings. Below the Commission first discusses the 
existence of latency arbitrage on IEX and the effectiveness of CQI in 
detecting it. Second, the Commission discusses whether the D-Limit 
order type will lead to ``quote fading'' or affect IEX's ability to 
maintain a protected quotation under

[[Page 54440]]

Regulation NMS.\29\ Third, the Commission discusses whether the D-Limit 
order type will permit unfair discrimination between customers, 
issuers, brokers, or dealers. Finally, the Commission discusses whether 
the D-Limit order type will impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the 
Exchange Act.
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    \29\ See 17 CFR 242.611.
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A. Protection From Latency Arbitrage

    As discussed above, IEX's stated purpose for the D-Limit order type 
is to protect liquidity providers on IEX from potential adverse 
selection resulting from latency arbitrage trading strategies, and 
thereby encourage its members to submit more displayed limit orders to 
IEX.\30\
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    \30\ See also IEX First Response to Comments, supra note 7, at 1 
(stating that ``certain microsecond-level latency arbitrage 
strategies . . . act as a powerful disincentive to the posting of 
displayed quotes by market participants, which has led to a long-
term trend of declining displayed liquidity and less transparency in 
equities trading'').
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    Some commenters opposed to the proposal argue that the data and 
analysis provided by IEX are insufficient for the Commission to 
determine that IEX's proposal is consistent with the Exchange Act. They 
question IEX's characterization of latency arbitrage and the data IEX 
uses to show that it exists, and ask about the performance of the CQI 
during periods of higher market volatility and for thinly traded 
stocks.
    One commenter asserts that IEX's data ``does not demonstrate the 
existence, or associated impact, of purported `latency arbitrage' on 
IEX, or that the [p]roposal is appropriately tailored to address any 
such problem.'' \31\ The commenter further argues that IEX fails to 
conduct a thorough analysis of liquidity taking orders executed when 
the CQI is ``on'' including whether such orders are from retail or 
institutional investors, are sweep orders taking out a price level 
across all exchanges, or are hedging activities.\32\ The commenter 
states that IEX focuses on the length of time that the CQI is on rather 
than the trading volume that is affected.\33\ In response, IEX states 
that resting limit orders on IEX ``are systematically subjected to 
adverse impacts of latency arbitrage strategies.'' \34\ In support of 
its statement, IEX shows that the CQI was on for 1.64 seconds per 
symbol per day on average, which is 0.007% of the time during regular 
market hours.\35\ In that very short period of time, however, the 
Exchange received 33.7% of marketable orders.\36\ In other words, the 
CQI is almost always ``off,'' but during the very short periods of time 
when it is ``on,'' IEX observes that ``certain types of trading 
strategies are seeking to aggressively target liquidity providers 
during periods of quote instability.'' \37\
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    \31\ See also Letter from Stephen John Berger, Managing 
Director, Citadel Securities, dated April 23, 2020, at 5 (``Citadel 
First Letter''). See also Letter from Stephen John Berger, Managing 
Director, Citadel Securities, dated August 14, 2020, at 2 (``Citadel 
Third Letter'').
    \32\ See Citadel First Letter, supra note 31, at 5. See also 
Citadel Third Letter, supra note 31, at 2.
    \33\ See Citadel First Letter, supra note 31, at 5.
    \34\ See Notice, supra note 3, at 72002.
    \35\ See id. at 72001-02 (based on data from September 2019). On 
a volume-weighted basis, IEX reports that, during the same period, 
the CQI was on for 5.9 seconds per day per symbol, or 0.025% of the 
time during regular market hours. See id.
    \36\ See id. at 72001. Further, 24% of displayed volume on IEX 
is executed when the CQI is on. See id. at 71999.
    \37\ See id.
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    As for which market participants are seeking to remove resting 
liquidity when the CQI is on, IEX estimates, based on how it classifies 
its members' logical order entry ports,\38\ that ``proprietary trading 
firms are more likely to trade against IEX resting orders when the CQI 
is on,'' while ``sessions classified as full-service and agency are 
more likely to seek to trade against IEX resting orders during the 
remainder of the day.'' \39\
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    \38\ See id. at 72002. One commenter objects to IEX's 
classification of it as a ``proprietary trading firm'' because 
``over 50% of our trading activity on IEX is on behalf of retail 
investors.'' Citadel First Letter, supra note 31, at 4. The 
commenter clarified in a second comment letter that it ``typically 
enter[s] into back-to-back transactions (one on the external venue 
and one with the retail broker-dealer).'' Letter from Stephen John 
Berger, Managing Director, Citadel Securities, dated July 2, 2020, 
at 2 (``Citadel Second Letter''). In other words, the Commission 
understands that the commenter is not directly routing the 
customer's order to exchanges, but rather is, for example, buying 
shares for its own account and selling shares to the customer. An 
anonymous commenter, describing himself or herself as ``someone with 
very intimate knowledge about the retail and wholesaling process'' 
states that ``what Citadel is not clarifying is that retail orders 
are likely sent to Citadel at random times (initiated by actual 
retail investors living in different parts of the world), but 
Citadel likely chooses to route these orders to IEX during a CQI 
condition'' (emphasis in original). Letter from Anonymous, undated, 
at 2. The anonymous commenter asserts that ``[d]uring that time, 
Citadel has a free option to hold the order and decide what to do 
with it'' and believes that ``clearly they aren't holding this order 
and waiting for a better price for retail to show up--they are 
waiting to make as much money for Citadel as possible.'' Id. The 
anonymous commenter further asserts that ``[n]one of [Citadel's] 
example has anything to do with retail being harmed.'' Id. at 3. 
Further, IEX provides updated data from January to April 2020 for 
firms that are publicly listed as being members of the FIA Principal 
Traders Group (which IEX notes is a self-described ``association of 
firms that trade their own capital on exchanges . . . .''), but 
excluded that commenter from the analysis even though it is a member 
of the Principal Traders Group. See Letter from John Ramsay, Chief 
Market Policy Officer, IEX, dated May 10, 2020, at 13 (``IEX Second 
Response to Comments''). IEX states that its new data, despite 
excluding that commenter's trading activity, still ``precisely 
matches patterns seen for all firms classified as proprietary . . . 
.'' Id. See also Letter from Anonymous, undated (challenging 
Citadel's characterization of the potential for harm to retail 
investors) and Letter from John Ramsay, Chief Market Policy Officer, 
IEX, dated August 3, 2020, at 5-6 (``IEX Third Response to 
Comments'').
    \39\ Notice, supra note 3, at 72002.
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    IEX states that its data evidences that members that enter 
liquidity-taking orders when the CQI is on ``appear to be able to 
engage in a form of latency arbitrage by leveraging fast proprietary 
market data feeds and connectivity along with predictive strategies to 
chase short-term price momentum and successfully target resting orders 
at unstable prices.'' \40\
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    \40\ Id.
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    One commenter states that the CQI is overbroad, and thus the impact 
of D-Limit orders will be ``much broader, affecting all types of 
liquidity takers'' including retail.\41\ The commenter reports that 15% 
of the retail-related liquidity-removing orders it routed to IEX in May 
2020 arrived when the CQI was on.\42\ The commenter questions whether 
the CQI may have turned on when it was routing portions of a large 
retail order to multiple exchanges to fill.\43\ If those away 
executions appeared to IEX to sequentially remove liquidity in a 
``crumbling'' manner, then the CQI could have turned on. In that case, 
had IEX been displaying D-Limit orders, those orders would get repriced 
before the commenter could remove that interest from IEX at the 
previously displayed less-aggressive price point unless the commenter 
accounts for the IEX access delay when routing so that its routing does 
not cause the CQI to turn on.\44\ Thus, the commenter asserts that the 
CQI detects more than just latency arbitrage and may broadly 
discriminate against all types of liquidity takers, in particular 
orders that are routed simultaneously to multiple

[[Page 54441]]

exchanges to cross the spread and remove liquidity at the bid or offer 
price.\45\
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    \41\ Citadel Second Letter, supra note 38, at 1.
    \42\ See id. at 3-4. The commenter says that ``[t]o provide a 
sense of scale, we executed over 2.5 million retail orders during 
the month of May 2020 that required more size than was available at 
the NBBO across all exchanges at the time of routing.'' Id. at 3. 
The commenter also states that it is the ``leading destination for 
retail orders, executing approximately 40% of all U.S.-listed retail 
volume.'' Citadel Second Letter, supra note 38, at note 6.
    \43\ See id.
    \44\ See id. The commenter provided an example of an ``actual 
retail order that removed displayed liquidity on IEX during the 
month of May 2020.'' See id. at 4. While it is unclear if this is a 
typical example, and the commenter did not provide timestamps or 
indicate the execution prices received, the scenario shows that the 
commenter did not receive a full and immediate execution on two 
venues (CboeEDGX and Nasdaq), as it ended up posting 100 shares on 
each venue. See id.
    \45\ See Citadel Third Letter, supra note 31, at 1-2.
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    In light of this, the commenter questions whether D-Limit orders on 
IEX will require broker-dealers to make changes to their routing 
strategies, and if so, whether those changes would increase complexity, 
introduce risks, and be consistent with regulatory requirements 
applicable to the routing of marketable orders.\46\ Specifically, the 
commenter asserts that ```[a]ccounting' for the IEX speed bump means 
routing to IEX first and intentionally delaying routing to other 
exchanges when accessing displayed liquidity'' (emphasis omitted).\47\ 
In response, IEX states that how D-Limit orders will interact with 
intermarket sweep orders depends on how broker-dealers route, which is 
``precisely the same choice that brokers face in routing to every other 
type of displayed order that exists in the market today,'' and the 
ability to account for geographic and technological differences (like 
the speed bump, which ``is the equivalent of physical distance'') when 
routing is not uniquely affected by the presence of D-Limit orders.\48\ 
As discussed directly below, the Commission has addressed this concern 
previously and reaffirms its views on the matter now, based on the 
understanding that intermarket routing can be accomplished in a manner 
to avoid such an outcome.
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    \46\ See id. at 5-6. See also Citadel Third Letter, supra note 
31, at 4.
    \47\ Citadel Third Letter, supra note 31, at 4.
    \48\ Letter from John Ramsay, Chief Market Policy Officer, IEX, 
dated August 20, 2020, at 2-3.
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    D-Limit orders should not necessitate material changes to routing 
strategies either for single orders or intermarket sweeps. The 
Commission previously addressed the commenter's concern about routing 
an order to IEX and accounting for its access delay when the Commission 
approved IEX's exchange registration. Specifically, the Commission 
explained that IEX's speed bump is ``well within the range of 
geographic and technological latencies that market participants 
experience today'' such that ``latency to and from IEX will be 
comparable to--and even less than--delays attributable to other markets 
that currently are included in the NBBO,'' and the Commission found the 
delay to be de minimis, i.e., so short as to not frustrate the purposes 
of Rule 611 by impairing fair and efficient access to IEX's 
quotation.\49\
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    \49\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41161 (June 23, 2016). Specifically, after 
entering through the POP in Secaucus, New Jersey, a user's 
electronic message sent to the IEX trading system must physically 
traverse the IEX ``coil,'' which is a box of compactly coiled 
optical fiber cable equivalent to a prescribed physical distance of 
61,625 meters (approximately 38 miles) (which is similar to the 
distance between the Nasdaq and NYSE data centers in Carteret and 
Mahwah, respectively). After exiting the coil, the message travels 
an additional physical distance to the IEX trading system, located 
in Weehawken, New Jersey. The entirety of that trip takes 
approximately 350 microseconds.
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    In considering the current proposal and concerns raised by the 
commenter, the same explanation provided to support approval of IEX's 
exchange registration pertains here. In effect, IEX's physical access 
delay (from the POP to the matching engine) is understood by market 
participants as the practical equivalent of treating the location of 
IEX's matching engine for routing purposes as more than 38 miles 
further away than its actual geographic location. In the Commission's 
view, market participants can, and generally do, account for this fact 
when routing to IEX. Thus, these routing adjustments do not constitute 
``preferencing'' of IEX because the adjustments do not mean a market 
participant has to arrive and trade first on IEX.\50\ Rather, to 
prevent the CQI from observing away executions and turning ``on'' 
before an order sent to IEX can execute on IEX, a broker-dealer need 
only continue to apply current routing techniques prevalent today. Such 
techniques, such as smart order routing strategies, are commonplace 
today and already take into account geographic and technological 
latencies, as well as exchange access delays, to capture liquidity 
across multiple venues simultaneously without signaling those 
executions to the market in a way that would impact prices or available 
liquidity.\51\ If utilized, such routing strategies could avoid 
triggering the CQI because quotes would not ``crumble'' in sequence as 
the various orders are routed to assure coordinated simultaneous 
executions across venues. The commenter asserts that routing first to 
IEX would be necessary to avoid triggering the CQI on market sweeps, 
but that does not mean routing to and arriving at IEX first. Rather, 
smart order routing that seeks to have orders arrive and execute 
simultaneously across multiple venues focuses on order arrival and the 
order transmission time is only a means to an end to achieve that 
outcome.\52\ Accordingly, the commenter has not presented persuasive 
evidence that all market sweeps necessarily trigger the CQI or that its 
liquidity-taking activities on IEX will be materially impacted to the 
detriment of retail investors. While the commenter presented evidence 
to show some correlation between its trading and the CQI being on, it 
did not present evidence that its trading caused the CQI to turn on or 
that such result is inevitable with current best practices in routing 
among broker-dealers. For instance, in the commenter's example it 
routed to six exchanges but did so in a way that appears to have 
obtained an execution on IEX last. If the commenter routed in a way 
that resulted in its order executing on IEX near-simultaneously with 
its executions on other markets, then the CQI could not have been 
triggered by the commenter's routed orders because the various exchange 
quotes would not have ``crumbled'' prior to the execution of the order 
on IEX. The means to route in this manner are common and do not require 
a broker-dealer to preference any particular exchange over any other 
exchange, as the point is to achieve simultaneous arrival and 
executions across multiple exchanges in a coordinated manner.
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    \50\ By analogy, routing parts of a large order to multiple 
exchanges is similar to a group of friends who live in separate 
locations meeting at a restaurant for a 7:00 p.m. dinner 
reservation. Each friend leaves his or her house at a different 
time, depending on how far away each lives from the restaurant, and 
all plan to arrive at the same time to make their reservation. While 
the friend that lives furthest away needs to start the journey 
first, all arrive together. Routing a large stock order to multiple 
exchanges is the inverse of that hypothetical, in which the goal is 
to take liquidity on each exchange as close to simultaneously as 
possible before other market participants can see and react to those 
executions. Because of IEX's speed bump, it often will be the 
``furthest away'' venue and so the journey to reach it starts first, 
but the execution does not need to occur first on IEX and thus 
preferencing IEX is not required.
    \51\ See, e.g., Securities Exchange Act Release No. 84528 
(November 2, 2018), 83 FR 58338 (November 19, 2018) (Disclosure of 
Order Handling Information; Final Rule) and Letter from Daniel 
Aisen, CEO, Proof Services LLC, dated December 24, 2019, at 5 
(``Proof Letter''). See also Securities Exchange Act Release No. 
78101, (June 17, 2016), 81 FR 41142, 41153 (June 23, 2016) (File No. 
10-222), at note 265 (discussing accounting for the non-variable IEX 
access delay when routing to IEX).
    \52\ See, e.g., Proof Letter, supra note 51, at 5. See also 
supra note 50.
---------------------------------------------------------------------------

    Rather, ``accounting'' for IEX's de minimis speed bump when routing 
orders is just like accounting for any other technological or 
geographic latency, and doing so is consistent with applicable rules 
and regulations and does not require inappropriately preferencing IEX. 
IEX's D-Limit proposal, because it does not introduce any new access 
delays, does not present any new issues in this respect. While the 
commenter focuses on the fact that IEX will be able to reprice D-Limit 
orders when the CQI triggers, market participants that post liquidity 
on IEX also monitor executions on away markets and could change or 
cancel

[[Page 54442]]

their quotes on IEX in response to that same information. In other 
words, with or without D-Limit orders, if a broker-dealer does not seek 
to maximize its fill rates while minimizing information leakage by 
accounting for latencies (e.g., technological, geographic, or access 
delay) when it routes portions of large orders to multiple venues near-
simultaneously, the broker-dealer runs the risk of missing out on 
executions at displayed prices. Accounting for those latencies is 
possible, using affordable and readily-available technology, and 
addresses the commenter's concern, which is unrelated to whether IEX 
has or does not have D-Limit orders.
    IEX further asserts that investors will not be negatively impacted 
when trying to access a quote on IEX that contains a displayed D-Limit 
order because brokers representing investor orders or trading on their 
behalf generally are not able to time their orders to arrive with the 
level of sophistication required to engage in latency arbitrage because 
they lack the ``low-latency tools to aggregate data from all the 
markets and react to price changes in microseconds.'' \53\ Further, 
referencing the commenters that support the proposal, IEX explains that 
``market participants who rely on the ability to access liquidity 
through `intermarket sweep' orders have clearly said they do not 
believe D-Limit would limit their ability to access liquidity at 
displayed prices.'' \54\ With respect to hedging activities, IEX argues 
that market makers hedge throughout the day and ``[i]t is not credible 
to suppose that orders from market markers sent to hedge risks on 
various markets happen to converge at IEX in the tiny time increments 
when the CQI signal is on.'' \55\ IEX further states that market makers 
that rely on the equities markets to hedge have supported the 
proposal.\56\ Finally, IEX states that marketable orders to take 
liquidity when the CQI is on account for over 20% of displayed volume 
executions on IEX, but less than 2% of total trading volume of non-
displayed interest.\57\
---------------------------------------------------------------------------

    \53\ See also IEX Second Response to Comments, supra note 38, at 
12 (stating that, if the CQI is on for 5 seconds in a day, then an 
investor's marketable order arriving randomly to IEX would have a 1 
in 5,000 chance of arriving when the CQI is on).
    \54\ See id.
    \55\ See id. at 14.
    \56\ See id.
    \57\ See id. at 12.
---------------------------------------------------------------------------

    IEX's characterization of latency arbitrage is supported by 
commenters asserting that latency arbitrage negatively impacts 
liquidity and price discovery. One commenter believes that ``speed 
advantages . . . have tilted the playing field in favor of firms 
specializing in `latency arbitrage,' reducing the willingness of both 
long-term investors and market makers to display quotes, to the 
detriment of price discovery and market efficiency.'' \58\ Another 
commenter states that ``[t]he disincentive to all market participants 
to provide displayed quotes in fear of getting `picked off' when the 
price of a security is in transition to a new price level continues to 
plague displayed markets.'' \59\ Similarly, another commenter opines 
that ``[a] growing body of academic research suggests that latency 
arbitrage strategies are equivalent to zero-sum `races' between high-
frequency traders (HFT) and may actually discourage liquidity provision 
by both HFT and non-HFT.'' \60\ Other commenters similarly assert that 
latency arbitrage causes some institutions to avoid posting displayed 
liquidity on exchanges, which they say can impact liquidity and price 
discovery.\61\
---------------------------------------------------------------------------

    \58\ See Letter from Kevin Duggan, Managing Director, Capital 
Markets, Ontario Teachers' Pension Plan, Benoit Gauvin, Vice-
President, CDPQ, and Alex Done, Deputy Comptroller, Office of New 
York City Comptroller, et al., at 1 (``Joint Letter from 27 Asset 
Managers''). See also Letter from Lev Bagramian, Senior Securities 
Policy Advisor, Better Markets, Inc., dated May 15, 2020.
    \59\ See, e.g., Letter from Mehmet Kinak, VP & Global Head of 
Systematic Trading & Market Structure and Jonathan D. Siegel, VP & 
Senior Legal Counsel--Legislative & Regulatory Affairs, T. Rowe 
Price, dated February 5, 2020, at 1 (``T. Rowe Letter''); and Letter 
from Brian Urey, Senior Trader, Allianz Global Investors, dated May 
12, 2020 (``Allianz Letter'').
    \60\ See and Letter from Marius-Andrei Zoican, Assistant 
Professor of Finance, University of Toronto-Mississauga, dated 
January 20, 2020, at 1 (``Zoican Letter''). See also Letter from 
John Christofilos, Senior VP, Chief Trading Officer, AGF, dated 
February 11, 2020, at 2 (``AGF Letter'') (``It is clear that latency 
arbitrage affects investors, brokers, and market makers, and as a 
result, the market is less liquid and more susceptible to volatile 
price swing.''); Letter from Sean Paylor, Trader, AJO, dated 
February 10, 2020, at 4 (``AJO Letter'') (``Trading from the back of 
the queue leads to lower fill rates during periods when the quote is 
stable and greater adverse selection when it is not (`last man 
standing' before a price change).''); Letter from Kenneth A. 
Bertsch, Executive Director, Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors, dated February 11, 2020, at 2 
(``CII Letter'') (``Long-term investors are at real and substantial 
risk from speed advantages of a small number of trading firms that 
specialize in `latency arbitrage,' which imposes a multi-billion-
dollar tax on institutional investors. A recent study sponsored by 
the Financial Conduct Authority suggested that this activity is 
endemic, and results in substantial losses to all liquidity 
providers.''); Letter from Philip Berlinski, Co-Chief Operating 
Officer, Equities, Global Markets, Goldman Sachs & Co. LLC, dated 
February 26, 2020, at 3 (``Goldman Sachs Letter'') (``Adverse 
selection stemming from latency arbitrage can have a negative effect 
on the national market system because liquidity providers may be 
more inclined to provide less liquidity at wider spreads.''); and 
Letter from Sanjana Kapur, Compliance Officer, Equity Compliance, 
Jefferies LLC, dated February 5, 2020, at 3 (explaining that one of 
its agency algorithms seeks ``the ability to participate in price 
discovery by displaying your interest without having to bear the 
cost of adverse selection (getting `picked off' by arbitrage-based 
strategies relying primarily on speed)'').
    \61\ See, e.g., AGF Letter, supra note 60, at 1; Letter from 
Joseph Scafidi, Global Heading of Trading, Carlos Oliveira, Heading 
of Trading Analytics and Market Structure, Brandes Investment 
Partners, LP, dated February 20, 2020, at 1 (``Brandes Letter''); 
Letter from Ray Ross, Chief Technology Officer, Clearpool Group, 
dated January 21, 2020, at 2 (``Clearpool Letter''); Goldman Sachs 
Letter, supra note 60, at 4; Letter from Gary Thompson, Executive 
Director, Head of Global Trading, Vontobel Asset Management, Inc., 
dated February 14, 2020, at 1.
---------------------------------------------------------------------------

    The comment file on this proposal reflects a dichotomy of views on 
the issue of latency arbitrage. On the one hand, some commenters 
question IEX's characterization of latency arbitrage and the 
performance of IEX's CQI, which is intended to detect it. On the other 
hand, other commenters, including investment firms with longer-term 
investment horizons and agency broker-dealers, state that they are 
adversely impacted by latency arbitrage.
    Even though the CQI is mostly off and comes on only when certain 
market-moving conditions are present, those small increments of time 
are meaningful on IEX because, as discussed above, a material amount of 
activity occurs during those moments.\62\ In those rare moments when 
market prices are in transition, a race condition exists between 
liquidity providers who want to reprice their on-exchange displayed 
liquidity to reflect the changing market prices and the liquidity 
takers who want to take before those updates can occur.\63\ This 
creates information asymmetries and can lead to other externalities, 
which can affect the willingness of many market participants to post 
displayed liquidity because it subjects their orders to adverse 
selection when prices move and they are not able to see or react as 
fast to those changing conditions.\64\ In turn, this race can have a 
meaningful effect on all market participants because it can incentivize 
investors to trade in the dark, either off exchange or through non-
displayed

[[Page 54443]]

exchange order types.\65\ The result is that a valuable source of 
liquidity may instead seek out dark non-exchange trading venues where 
the speed traders' advantages are moot, but in doing so this liquidity 
is no longer displayed to and accessible by the market as a whole. Such 
an outcome does not advance the Exchange Act's goal of promoting fair 
and orderly securities markets. IEX's D-Limit order type seeks to 
compete with those other trading venues by incentivizing more displayed 
liquidity through improved execution quality for liquidity providers.
---------------------------------------------------------------------------

    \62\ See supra note 36 and accompanying text.
    \63\ See, e.g., Letter from Joseph Saluzzi, Themis Trading, 
dated February 6, 2020, at 2 (``[t]hose who have paid top-dollar for 
high speed data related products, race each other to pick off stale 
orders from investors who haven't necessarily paid for the same low 
latency technology.'') (``Themis Letter''); Zoican Letter, supra 
note 60, at 1 (stating that there is a growing body of academic 
research suggests that latency arbitrage strategies are equivalent 
to zero-sum `races' between high-frequency traders).
    \64\ See supra notes 58-61 and accompanying text. See also, 
e.g., AJO Letter, supra note 60, at 2 (``Instead of offering all 
market participants equal access at the same speed, the exchanges 
have created a multi-tiered system, effectively tilting the odds in 
favor of a small subset of firms that possess the resources to 
invest in the lowest-latency infrastructure'') and Allianz Letter, 
supra note 59, at 2.
    \65\ See, e.g., Letter from Gregory Davis, Managing Director and 
Chief Investment Officer, The Vanguard Group, Inc., dated April 23, 
2020, at 3 (``Vanguard Letter'') (``This high-speed environment 
discourages all but the fastest market participants from posting 
their trading interest.'').
---------------------------------------------------------------------------

    Furthermore, exchange functionality that protects resting displayed 
orders against adverse selection resulting from latency arbitrage will 
improve the execution quality experienced by market participants that 
post displayed liquidity and are affected by such adverse selection. 
This improved execution quality could encourage more displayed 
liquidity, which in turn, would contribute to fair and orderly markets 
and support the public price discovery process. Specifically, if 
sufficiently protected against being ``picked off'' when the conditions 
for latency arbitrage are present, long term investors will no longer 
experience those relatively poor executions and thus will have less 
incentive to avoid posting displayed orders on exchanges. Accordingly, 
as suggested by some commenters, long term investors could shift a 
portion of their order flow back onto the exchange as displayed orders. 
The result would be an increase in displayed liquidity as a more 
diverse group of long term investors participates in the exchange 
market, which would in turn facilitate fair competition, economically 
efficient executions, and an opportunity for long term investors' 
orders to be executed without the participation of a dealer.\66\
---------------------------------------------------------------------------

    \66\ See 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    A substantial amount of IEX's overall execution volume is 
attributable to non-displayed interest. Thus, when the CQI is on, the 
marketable interest IEX receives is not seeking merely to access 
liquidity on IEX in the normal course, but rather is seeking 
specifically to remove a displayed quote on IEX in a manner consistent 
with what IEX identifies as latency arbitrage.\67\ In other words, IEX 
has demonstrated that the market conditions that trigger activation of 
the CQI are the same short-term market conditions that the most highly 
sophisticated latency-sensitive traders detect and seek to trade on. 
The Commission also finds persuasive comments from asset managers 
supporting the proposal who argue that the prevalence of such trading 
strategies impacts their willingness to participate in the on-exchange 
displayed market where the public price discovery process takes place. 
IEX responds to those long-standing concerns by now offering a narrowly 
tailored tool that balances the ability of long-term investors to 
access displayed liquidity in the ordinary course against the current 
structural advantages enjoyed by short-term latency arbitrage trading 
strategies that rely on superior access to the fastest data and 
connectivity, while also encouraging liquidity providers to post more 
displayed liquidity.\68\ Many commenters state that the proposal would 
be useful in addressing such concerns without being overbroad.\69\ The 
Commission concludes that this attempt by IEX to promote the ability of 
long-term investors to post liquidity on its exchange by 
counterbalancing the existing advantages used in short-term trading 
strategies is consistent with the Exchange Act.\70\ As discussed below, 
exchanges should be able to innovate to address this concern.
---------------------------------------------------------------------------

    \67\ See supra note 7 and accompanying text.
    \68\ IEX notes in its filing that other exchanges use 
transaction rebates and volume tiers ``to essentially compensate 
market makers and other liquidity providers for posting aggressive 
limit orders'' that are subjected to the effects of latency 
arbitrage, but IEX believes ``that these pricing schemes can 
contribute to a number of conflicts of interest and market 
distortions including, among others, conflicts of interests, excess 
intermediation and potential adverse selection, market 
fragmentation, complexity, the proliferation of new order types to 
enable avoidance of fees, and elevated fees to subsidize rebates'' 
and does not use them. See Notice, supra note 3, at 72002.
    \69\ See, e.g., Allianz Letter, supra note 59; Brandes Letters, 
supra note 61; and T. Rowe Letter, supra note 59.
    \70\ See infra Sections III.C-E.
---------------------------------------------------------------------------

    Therefore, because IEX's proposal promotes the interest of long 
term investors in a narrowly tailored manner that will inure to the 
benefit of displayed markets, leading to increased displayed liquidity 
from which all market participants ultimately will benefit, IEX's 
proposal is consistent with the Exchange Act, including the protection 
of investors and the public interest.
    One commenter questions whether the statistics IEX presented in its 
filing, which were based on data collected during September 2019, ``are 
representative of other time periods or of different market 
environments.'' \71\ The commenter considers that period to be normal 
market conditions and believes that IEX should provide more 
``representative data'' to address how the CQI operates during periods 
of market volatility.\72\ The commenter states that IEX's failure to do 
so renders IEX's proposal incapable of showing whether the proposed D-
Limit order is appropriately tailored to address the issue that IEX 
seeks to address.\73\ The commenter also states that IEX provided 
aggregated data across all stocks but does not provide data in its 
filing for different types of stocks, like thinly traded symbols, which 
may or may not experience the CQI in the same way as more liquid 
stocks, and thus questions whether IEX's ``figures hold true for all 
categories of symbols, including those which are subject to frequent or 
routinely-high levels of volatility.'' \74\
---------------------------------------------------------------------------

    \71\ Letter from Joan C. Conley, Senior Vice President & 
Corporate Secretary, Nasdaq, Inc., dated January 21, 2020, at 6 
(``First Nasdaq Letter''). See also, e.g., Letter from Jeffrey 
Bacidore, Ph.D., President, The Bacidore Group, LLC, dated February 
13, 2020, at 2-3 (``Bacidore Letter'').
    \72\ See First Nasdaq Letter, supra note 71, at 4-7. See also 
Bacidore Letter, supra note 71, at 2-3.
    \73\ See First Nasdaq Letter, supra note 71, at 4-7. See also 
Bacidore Letter, supra note 71, at 2-3.
    \74\ See First Nasdaq Letter, supra note 71, at 4-7. See also 
Bacidore Letter, supra note 71, at 2-3.
---------------------------------------------------------------------------

    In response to these concerns, IEX provided additional data in its 
two responses to comments and asserts that the results remain 
consistent.\75\ With respect to longer periods and periods of higher 
market-wide volatility, IEX looked at data from the fourth quarter of 
2019 and found that, ``based on IEX average-weighted volume, the CQI 
was on for 0.021% of the time during regular market hours, virtually 
the same as the 0.025% of the time it was on for September 2019.'' \76\ 
IEX also looked at the period of January to April 2020, which IEX 
states involved an ``unprecedented `stress test' as a result of market 
volatility connected to the COVID-19 pandemic,'' and IEX reports that 
the CQI was on between 0.026% (for January 2020) and 0.125% (for March 
2020) of the time during regular market hours.\77\ IEX asserts that, 
``during

[[Page 54444]]

one of the most volatile and unprecedented months in the history of the 
stock market,'' the CQI was only on for 0.125% of the trading day on 
average.\78\ Further, IEX calculated the percent of displayed volume 
that traded when the CQI was ``on'' during that period, and found that 
it ranged between 22% (for March 2020) to 24.4% (for January 2020).\79\ 
IEX concludes that its updated data ``confirms that the CQI signal 
performs extremely well and consistently in extreme, and in `normal' 
market conditions.'' \80\
---------------------------------------------------------------------------

    \75\ See IEX First Response to Comments, supra note 7; IEX 
Second Response to Comments, supra note 38.
    \76\ See IEX First Response to Comments, supra note 7, at 15. 
IEX also examined aggregate CQI data during a December 2018, which 
IEX asserts was a period of relatively higher market-wide 
volatility. While IEX found that the CQI was ``on'' for relatively 
more time (an average of 0.060% per symbol per trading day during 
December 2018 compared to 0.025% during September 2019), IEX 
characterized that relatively higher level as ``nonetheless 
extremely low, corresponding to approximately 15 seconds per day per 
symbol on average during regular market hours.'' Id. at 16.
    \77\ IEX Second Response to Comments, supra note 38, at 16. IEX 
states that the CQI was ``on'' longer in March 2020 ``because of the 
extraordinary increase in the number of quote changes per stock in 
that month.'' Id. at 17.
    \78\ Id. at 16-17. IEX notes that during that period, the 
market-wide circuit breakers were triggered 4 times in 8 trading 
days and the VIX volatility index recorded its highest-ever value on 
March 16. See id.
    \79\ Id. at 17. IEX observes that this proportion remained 
``remarkably consistent throughout the period'' even though the 
absolute number of trades was much higher in March and April. See 
id.
    \80\ Id.
---------------------------------------------------------------------------

    IEX also examined data from the fourth quarter of 2019 on the 
amount of time that the CQI was on for certain individual stocks that 
IEX classified as subject to greater volatility, and found that for 
those stocks, ``which tend to also be stocks that are more thinly-
traded, the CQI was on less often than for stocks with lower 
volatility.'' \81\
---------------------------------------------------------------------------

    \81\ IEX First Response to Comments, supra note 7, at 16.
---------------------------------------------------------------------------

    With respect to the CQI and thinly traded stocks, IEX examined data 
from the fourth quarter of 2019 and found that ``the CQI was actually 
significantly less active than for stocks with higher [average daily 
volume].'' \82\ IEX explained that, for thinly traded stocks, ``the CQI 
necessarily will fire less often . . . because there are fewer data 
points from which to draw in making predictions'' and thus ``there will 
be less repricing of the orders, which directly counters the arguments 
that CQI would have a larger impact in those symbols.'' \83\ IEX 
concludes that its data shows that D-Limit would not impede access to 
thinly-traded or other stocks.\84\
---------------------------------------------------------------------------

    \82\ Id. at 15.
    \83\ Id. at 16.
    \84\ Id.
---------------------------------------------------------------------------

    A few commenters also request that IEX provide more information on 
the accuracy of the CQI. One commenter states that IEX's filing 
provides no data of when CQI ``activates mistakenly in circumstances 
where it should not do so'' where it would cause ``needless missed 
executions for liquidity takers.'' \85\ Similarly, another commenter 
states that IEX should provide more data on the accuracy of the CQI, 
such as the percentage of time that the CQI accurately predicts NBBO 
changes, the number of times the CQI inaccurately predicted a change, 
and how the accuracy rate has evolved with each update.\86\
---------------------------------------------------------------------------

    \85\ See First Nasdaq Letter, supra note 71, at 7.
    \86\ See Letter from Joanna Mallers, Secretary, FIA Principal 
Traders Group, dated January 21, 2020, at 6 (``First FIA PTG 
Letter'').
---------------------------------------------------------------------------

    IEX responds to those comments by providing data on CQI performance 
during the January to April 2020 period, where it found that the CQI 
``accurately predicted the direction of the next price change (not time 
bound) in 75.5% of the cases, on a volume-weighted basis.'' \87\ A 75% 
accuracy rate for the CQI shows that it succeeds, far more often than 
not, in detecting the conditions for latency arbitrage, and thus it is 
successful in informing order types designed to mitigate the impact of 
that latency arbitrage.\88\ The CQI is on so infrequently and detects 
events that are such idiosyncratic anomalies within the current market 
structure that only a small number of market participants are capable 
of detecting and acting upon them. As such, the CQI does not result in 
needless missed executions for most traders, though it will make it 
more difficult for a few latency arbitrage traders to profit by taking 
advantage of idiosyncrasies in market structure to trade with stale-
priced displayed quotes on IEX, as further discussed below.
---------------------------------------------------------------------------

    \87\ IEX Second Response to Comments, supra note 38, at 21. The 
CQI's accuracy is substantial.
    \88\ Further, the D-Peg order type, which is designed to protect 
non-displayed midpoint orders from latency arbitrage and is informed 
by the CQI, has been popular with the agency brokers and full-
service brokers that it is intended to protect. Those market 
participants carefully monitor their execution quality and thus must 
regard the CQI as accurate or else they would not be expected to use 
D-Peg orders. See id. at 15 (noting that ``D-Peg alone has executed 
over 111 billion shares of volume since IEX was approved as an 
exchange with over 90% of that volume from agency and full-service 
brokers''). If the CQI were not accurate, then users of D-Peg orders 
would needlessly miss out on executions and, as a result, would 
receive poor execution quality and be expected to avoid using the D-
Peg order type. Because the D-Peg order type is popular on IEX, its 
ability--by function of the CQI--to protect the liquidity provider 
is apparent.
---------------------------------------------------------------------------

    Thus, in response to all of the commenters' concerns discussed in 
this section about the CQI, and the representativeness of the data that 
IEX provided in support of its proposal, IEX provided additional data 
and analysis and concludes that ``(i) the fraction of the trading day 
that the CQI is on is consistent in different time periods; (ii) the 
CQI is on for less of the trading day for thinly-traded securities 
compared to all securities; (iii) the CQI is on for less of the trading 
day for securities that experienced higher volatility than for lower 
volatility securities; and (iv) during a high volatility period, the 
period of time the CQI was on continued to be extremely low (about 15 
seconds during the trading day).'' \89\
---------------------------------------------------------------------------

    \89\ Id.
---------------------------------------------------------------------------

    IEX has provided a sufficient amount of data and analysis to allow 
the Commission to consider the full range of issues raised by IEX's 
proposal. Based upon the overall record, including the data and 
analysis submitted by IEX described immediately above and the comments 
received, the Commission finds that the proposal is consistent with the 
Exchange Act. As explained above, the Commission finds that the 
proposal promotes the interest of long term investors in a narrowly 
tailored manner that will inure to the benefit of displayed markets, 
leading to increased displayed liquidity from which all market 
participants ultimately will benefit.\90\ The Commission finds that the 
proposed D-Limit order type is narrowly and appropriately tailored to 
achieve those benefits. As discussed above, some commenters 
characterize the data IEX provided in its filing as insufficient, and 
question how the CQI performs during periods of higher market 
volatility and for thinly traded stocks.\91\ However, the Commission is 
persuaded by the data and analysis IEX provided in its filing and its 
responses to comments.
---------------------------------------------------------------------------

    \90\ See supra notes 62-70 and accompanying text.
    \91\ See supra notes 32-34 and accompanying text.
---------------------------------------------------------------------------

    Market events over the past several months have provided an 
environment for IEX to test the consistency of its CQI in periods of 
significant volatility. IEX did so and shows that the period of market 
volatility observed in early 2020 did not cause the CQI's behavior to 
differ markedly from the data IEX provided in its filing. Further, IEX 
shows that more volatile stocks and thinly traded stocks were not 
unduly impacted by the CQI. Thus, the Commission concludes that the 
data IEX provided in its filing on latency arbitrage and the CQI was 
``representative of other time periods or of different market 
environments'' and IEX's ``figures hold true'' for different types of 
stocks that were subject to higher levels of volatility.

B. Prior Commission Consideration of the CQI

    One commenter expressed concern that the use of CQI by IEX ``shifts 
the exchange's role from a platform designed to facilitate price 
discovery into an active participant in the price discovery function.'' 
\92\
---------------------------------------------------------------------------

    \92\ Letter from Adam Nunes, Head of Business Development, 
Hudson River Trading LLC, dated January 21, 2020, at 2 (``HRT 
Letter''). See also Citadel First Letter, supra note at 31, at 11. 
One commenter argues that IEX will be exercising actual discretion 
over the execution of a D-Limit order and thus will be engaging in 
traditional broker-dealer activities in offering the D-Limit order 
type informed by the CQI, because ``its predictive nature and 
potential for error makes it difficult to distinguish from typical 
broker-dealer order routing and execution algorithms (which are also 
codified).'' See First FIA PTG Letter, supra note 86, at 5-6. The 
Commission previously addressed the CQI and IEX's discretionary 
order type functionality and determined that it does not result in 
IEX engaging in traditional broker-dealer activities. See, e.g., 
Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 
41142, 41153 (June 23, 2016) (File No. 10-222) (granting the 
application of IEX for registration as a national securities 
exchange). Such also is the case with IEX's D-Limit proposal, as D-
Limit orders will not allow IEX to exercise any discretion on any 
particular order by deviating from the CQI and D-Limit 
functionality, which is hardcoded in the IEX rulebook. While broker-
dealer algorithms also are codified, broker-dealers do not have to 
align their algorithms with Section 6 of the Exchange Act nor do 
they need to file all applicable rules with the Commission as IEX 
does for the CQI and its order types.

---------------------------------------------------------------------------

[[Page 54445]]

    The Commission disagrees with the commenter's characterization of 
the CQI functionality. The CQI does not place IEX into the role of an 
active participant in the price discovery function, nor is IEX making 
investment pricing decisions through the CQI. As the Commission 
previously addressed in connection with IEX's exchange registration, 
IEX's discretionary orders are ``unique in the way that the discretion 
functionality will be turned `on' or `off' depending on IEX's quote 
stability determination.'' \93\ Among other things, IEX has ``encoded 
in its rule the totality of the discretionary feature'' and therefore 
the ``hardcoded conditionality'' of the discretionary feature does not 
provide IEX ``with actual discretion or the ability to exercise 
individualized judgment when executing an order.'' \94\ Though the 
Commission was discussing the DPeg order type in the IEX exchange 
registration context, the Commission recognizes that D-Limit will use 
the exact same CQI functionality that underlies the DPeg. And, as the 
Commission has previously stated, the CQI, which uses a ``pre-
determined, objective set of conditions that are detailed in IEX's 
[rules]'' and which any market participant can thus recreate on its 
own, will allow users to submit D-Limit orders and have them operate as 
designed and as reflected in IEX's rules. In so doing, users of D-Limit 
orders can better achieve their goals when their orders operate 
efficiently. Further, as discussed below, D-Limit orders and any 
associated liquidity-provision and price discovery benefits will be 
available to all users.
---------------------------------------------------------------------------

    \93\ Securities Exchange Act Release No 78101, (June 17, 2016), 
81 FR 41142, 41153 (June 23, 2016) (File No. 10-222).
    \94\ Id.
---------------------------------------------------------------------------

C. Quote Accessibility and Impact on Displayed Markets

    Discretionary order types informed by the CQI, discussed above, are 
not new for IEX. What is novel in this proposal is that (1) the 
proposed D-Limit order could be displayed and (2) the CQI functionality 
would be used to ``exercise discretion'' to move the order to a less 
aggressive price.\95\
---------------------------------------------------------------------------

    \95\ Non-displayed D-Limit orders would not raise any new or 
novel issues not previously considered in connection with IEX's non-
displayed discretionary order types. See, e.g., Securities Exchange 
Act Release No. 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016) 
(File No. 10-222) (In the Matter of the Application of: Investors' 
Exchange, LLC for Registration as a National Securities Exchange; 
Findings, Opinion, and Order of the Commission). See also Letter 
from R. T. Leuchtkafer, dated August 3, 2020, at 2-3 (``Leuchtkafer 
Letter'') (pointing out that IEX currently reprices displayed orders 
in certain scenarios, including to comply with other regulatory 
requirements, in situations that do not involve the CQI).
---------------------------------------------------------------------------

    Several commenters assert that the D-Limit Order type, if 
displayed, would result in what the commenters refer to as ``quote 
fading'' or ``phantom liquidity'' on IEX if market participants have 
difficulty accessing the D-Limit order liquidity that is displayed on 
IEX, and some question whether the D-Limit order type would be 
consistent with the requirements of Regulation NMS.
1. Quote Fading and Phantom Liquidity
    Quote fading and phantom liquidity both refer, from the perspective 
of the liquidity taker, to the ability to execute against a displayed 
quote. The ability of any market participant to successfully execute 
against any particular displayed quote is subject to a number of 
factors and is not guaranteed on any market, as at any time any market 
participant can be seeking to execute against an order that is being 
repriced, changed, cancelled, or executed by a different market 
participant.
    Some commenters express concern that displayed D-Limit orders might 
result in more ``quote fading'' or ``phantom liquidity'' and thus 
negatively impact market participants seeking to take liquidity. One 
commenter describes its concern ``about quote accessibility as a result 
of a displayed limit order being repriced based on IEX's crumbling 
quote indicator'' and recommends that consideration be given ``to the 
impact on an order attempting to seek liquidity from a posted D-Limit 
Order'' when the CQI causes the D-Limit order to reprice because ``the 
IEX protected quote that broker-dealers are attempting to access would 
no longer be at the price that they are trying to execute against . . . 
.'' \96\ That commenter further asserts that even if the extent of 
quote fading caused by the use of D-Limit Orders is not ``meaningful,'' 
there is no ``de minimis threshold to the Firm Quote Rule'' and 
therefore D-Limit orders ``could further erode the integrity of a 
displayed quotation.'' \97\ Another commenter raises the same concern, 
stating that D-Limit quotes would be ``nothing more than a `maybe' 
quote or indication of interest.'' \98\ Likewise, another commenter 
articulates this concern by asserting that firms ``would be blind as to 
how to make informed trading decisions'' because there will be no 
indicator in the market data feeds that will reveal when IEX's quote 
includes a D-Limit order, which the commenter characterizes as an order 
type that is subject to fading.\99\ More specifically, a different 
commenter opines that specific types of market participants--
institutional and retail traders--will be harmed by the quote fading 
concerns presented by D-Limit orders when those traders experience 
declining fill rates as they sweep the market by sending a portion of a 
larger order to IEX but are unable to access D-Limit orders that are 
being repriced by IEX.\100\
---------------------------------------------------------------------------

    \96\ Letter from Ellen Greene, Managing Director, Equity and 
Options Market Structure, SIFMA, dated February 5, 2020, at 1-2 
(``SIFMA Letter''). See also Letter from Andrew Stevens, General 
Counsel, IMC, dated January 22, 2020, at 2 (``IMC Letter'') 
(characterizing D-Limit as a ``perilous gimmick that creates a safe 
zone for illusory orders'' that would allow ``systematic quote 
fading'').
    \97\ See SIFMA Letter, supra note 96, at 3. Cf. Goldman Sachs 
Letter, supra note 60, at 2-3 (arguing that, with respect to firm 
quote requirements, ``D-Limit Orders are no different from the 
operation of peg order types'' and thus comply with the requirements 
of Rule 602 of Regulation NMS). The possibility that a displayed 
quotation can change before someone can access it does not, by 
itself, mean that the quote is not firm for purposes of Rule 602. 
For example, the liquidity provider that posted the order might have 
changed or cancelled it.
    \98\ See Letter from Mary M. Dunbar, DLA Piper LLP (US), dated 
March 10, 2020, at 2-3 (``DLA Piper Letter''). D-Limit orders are 
not equivalent to an indication of interest, because indications of 
interest normally require a subsequent and manual ``firm up'' 
instruction by the submitting member in order to execute against 
incoming trading interest. See, e.g., Securities Exchange Act 
Release No. 83663 (July 18, 2018), 83 FR 38768, 38847-48 (August 7, 
2018) (Regulation of NMS Stock Alternative Trading Systems; Final 
Rule) (discussing IOIs).
    \99\ See First Nasdaq Letter, supra note 71, at 2-3.
    \100\ See First FIA PTG Letter, supra note 86, at 3-4.
---------------------------------------------------------------------------

    In contrast, other commenters, including institutional investors 
and asset managers that trade equities, do not believe D-Limit orders 
will less accessible. For example, one commenter says that it is 
``confident that D-Limit

[[Page 54446]]

orders will be as accessible to our orders and those representing other 
institutional asset managers as any other liquidity is available today 
from other venues.'' \101\ Other commenters opine that D-Limit orders 
could be more accessible than liquidity on other venues.\102\ Another 
commenter asserts that quote fading ``is not a new phenomenon'' and 
says that they ``experience quote fading every day on every other 
exchange'' as latency arbitragers commonly trade ahead of their 
liquidity seeking orders.\103\ The commenter explains that, in its 
trading experience, ``latency arbitragers are front-running our 
liquidity-seeking child orders and taking the posted liquidity we seek 
before our orders arrive.'' The commenter regards this as ``unnecessary 
intermediation'' and argues it ``is not an example of price discovery, 
it is a form of predatory trading that increases investor costs'' and 
is ``also the very behavior that D-Limit seeks to combat.'' \104\ 
Further, one commenter believes that institutional investors would not 
be harmed by displayed D-Limit orders ``since institutional order 
`taking' strategies are driven by a fundamental demand for liquidity 
and are not intentionally seeking to trade while the CQI is `on.' '' 
\105\ Another commenter agreed, noting that institutional traders 
``almost always initiate orders during stable markets, so they should 
have little trouble accessing displayed D-Limit quotes'' and when they 
do trade using ``reactive'' strategies ``there is such a dramatic gap 
in speed between the elite proprietary trading firms and even the 
relatively fast agency brokers, that by the time these reactive agency 
tactics are able to act, any favorable opportunities have already been 
exploited by their faster counterparts'' and ``they would have likely 
been too late either way.'' \106\
---------------------------------------------------------------------------

    \101\ Letter from David Brooks, Director of Trading, The London 
Company of Virginia LLC, dated February 20, 2020, at 2 (``The London 
Company Letter'').
    \102\ See Joint Letter from 27 Asset Managers, supra note 58 
(noting that ``other exchanges with protected quotations sell 
multiple speeds of technology and data, which may make their 
quotations less accessible to those who do not purchase the same 
tier of access from the exchange. So, in practical terms, we believe 
that IEX D-Limit meets the current standards of a protected quote 
and these quotes will likely be more accessible to traditional 
investors than quotes on other exchanges.'').
    \103\ AJO Letter, supra note 60, at 4.
    \104\ Id.
    \105\ T. Rowe Letter, supra note 59, at 2. The commenter 
believes that D-Limit orders would help liquidity providers defend 
themselves against ``reactive strategies used by a small subset of 
proprietary trading firms that invest in high speed infrastructure 
to predict price changes, leverage small latency advantages, and 
opportunistically trade against stale quotes.'' Id.
    \106\ Proof Letter, supra note 51, at 5.
---------------------------------------------------------------------------

    Responding to the concerns about quote fading and phantom 
liquidity, IEX asserts that ``an exchange quote is accessible only to 
the degree that the participant is able to send a message that can 
execute against the quote before someone else accesses it or the quote 
is cancelled before the taker's order arrives.'' \107\ On that point, 
IEX argues that the commenters raising concerns over quote fading are 
implying that the D-Limit repricing ``will deprive investors or their 
agents of prices they otherwise would be able to access.'' \108\ IEX 
does not believe that to be the case, and explains that ``exchange 
quotes are not equally accessible to all participants'' but rather 
``are only reliably accessible to participants using the fastest 
trading strategies and the fastest market information.'' \109\
---------------------------------------------------------------------------

    \107\ See IEX First Response to Comments, supra note 7, at 7.
    \108\ See id.
    \109\ See id.
---------------------------------------------------------------------------

    For example, with respect to situations in which the NBB or NBO is 
in transition, IEX believes that ``quotes on exchanges that remain at 
the soon-to-be stale price will either be accessed first by a fast 
market participant, or they will be canceled before they can be 
executed by anyone'' and thus concludes that ``[i]n either event, 
quotes on other exchanges will not be accessible in these moments to 
institutional investors, which are not seeking to trade in these 
moments.'' \110\ IEX instead focuses on the prospect that if the D-
Limit functionality ``gives liquidity providers more incentive to 
provide displayed liquidity, then any investor seeking to trade in the 
99.96% of the day when the CQI is off will have more opportunities to 
access liquidity on IEX, without the need to buy new low-latency 
tools.'' \111\
---------------------------------------------------------------------------

    \110\ See id. at 8.
    \111\ See id. at 7-8.
---------------------------------------------------------------------------

    Some commenters question whether similar order types, if adopted by 
other exchanges, could collectively result in quote fading or have 
other negative market-wide effects. One commenter believes that the 
market-wide impact ``may be profound for symbols that are subject to 
routinely-high levels of price volatility'' or ``during times of market 
duress,'' and that such impact would be ``amplified'' if other 
exchanges adopt something similar.\112\ Another commenter states that 
approval of this proposal would ``open a Pandora's box, as other 
exchanges introduce similar order types, leading to more and more 
liquidity `fading' in a correlated manner, an effect which could be 
most pronounced in times of market stress.'' \113\ Likewise, another 
commenter states that ``it is important to consider that most of the 
liquidity on IEX is `dark'/non-displayed . . . if one or more exchanges 
with significant lit liquidity were to offer the same D-Limit Order or 
similar order types, this functionality would exacerbate the number of 
inaccessible quotes in the marketplace.'' \114\
---------------------------------------------------------------------------

    \112\ See First Nasdaq Letter, supra note 71, at 3. But see IEX 
Second Response to Comments, supra note 38 (discussing data from 
January to April 2020 to show that the CQI does not behave 
profoundly differently during periods of exceptional price 
volatility and market duress).
    \113\ See Bacidore Letter, supra note 71, at 3.
    \114\ See SIFMA Letter, supra note 96, at 4. See also DLA Piper 
Letter, supra note 98, at 5; Citadel First Letter, supra note at 31, 
at 10. To the extent that another exchange seeks to adopt its own 
speed bump, crumbling quote indicator, and D-Limit order type, the 
Commission would carefully analyze it and the comments received 
thereon, and consider whether the new proposal is narrowly tailored 
to achieve its stated objectives and consistent with the Exchange 
Act and the rules and regulations thereunder.
---------------------------------------------------------------------------

    IEX's D-Limit order type, if displayed, would not impair access to 
IEX's quotation because IEX is not introducing any additional access 
delay. Further, IEX would only rarely reprice the order in response to 
a very targeted and specific pre-defined signal that suggests a high 
potential for latency arbitrage. When the CQI is off, which, as 
discussed above, is virtually the entire regular trading hours session, 
a D-Limit order is simply a regular limit order and thus will be as 
equally accessible as any other limit order on IEX. For the small part 
of the day when the CQI is on, market participants that are not 
engaging in latency arbitrage trading strategies are unlikely to be 
seeking to trade with a D-Limit order precisely when it is in the 
process of being repriced by IEX because IEX's data shows that latency 
arbitrage trading (as signaled by the CQI) is very highly concentrated 
and reactive in nature.\115\ Conversely, dozens of commenters that 
represent institutional traders and investors say that they do not 
trade in this manner and are unable to compete with the small number of 
firms that purchase the necessary systems, connectivity, and exchange 
proprietary market data to target their trading to those precise 
periods when crumbling quotes cause the CQI to turn ``on.'' \116\ 
Exchanges should be able to innovate to

[[Page 54447]]

address this competitive imbalance in a manner that is consistent with 
the Exchange Act.
---------------------------------------------------------------------------

    \115\ See, e.g., IEX Second Response to Comments, supra note 38, 
at 13-14.
    \116\ See, e.g., T. Rowe Letter, supra note 59, at 2 (noting 
that ``institutional order `taking' strategies are driven by a 
fundamental demand for liquidity and are not intentionally seeking 
to trade while the CQI is `on.''').
---------------------------------------------------------------------------

    Given how narrowly tailored the CQI is and how infrequently it 
activates, IEX's D-Limit order type will not result in the average 
market participant experiencing significant quote fading when trying to 
take liquidity on IEX, though, as discussed above, it will by design 
effect speed traders engaging in latency arbitrage. By protecting 
liquidity providers in a narrowly tailored way, IEX may attract 
additional liquidity through D-Limit orders, including from new types 
of market participants, which will promote more displayed liquidity 
that will be available to all market participants.\117\ Therefore, the 
Commission finds that the D-Limit order type is consistent with Section 
6(b)(5) of the Exchange Act in that it is designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \117\ See also supra note 68-70 and accompanying text. See also 
infra note 138 and accompanying text.
---------------------------------------------------------------------------

2. Automated Quotes and Rule 611
    In general, Rule 611 under Regulation NMS protects the best 
``automated'' quotations of exchanges by obligating other trading 
centers to honor those ``protected'' quotations by not executing trades 
at inferior prices, or ``trading through'' such best automated 
quotations.\118\ Only an exchange that is an ``automated trading 
center'' displaying an ``automated quotation'' is entitled to this 
protection.\119\ Among other things, an ``automated quotation'' must be 
immediately and automatically executable.\120\
---------------------------------------------------------------------------

    \118\ See 17 CFR 242.611. ``Trading through'' refers to the 
purchase (sale) of NMS stock at a price lower (higher) than the best 
bid (offer).
    \119\ See 17 CFR 242.600(b)(4) (defining ``automated trading 
center'') and 17 CFR 242.600(b)(3) (defining ``automated 
quotation'')
    \120\ See 17 CFR 242.600(b)(3).
---------------------------------------------------------------------------

    Several commenters argue that D-Limit orders will not be 
``automated quotations'' under Regulation NMS, and thus they should not 
be ``protected'' quotations under Rule 611 of Regulation NMS.\121\ They 
argue that the D-Limit functionality, combined with the IEX speed bump 
and IEX's ability to bypass it to adjust the price of displayed D-Limit 
orders when the CQI is on, is inconsistent with the requirements for 
immediate and automatic execution required for automated quotations to 
be protected under Rule 611.\122\
---------------------------------------------------------------------------

    \121\ See, e.g., First Nasdaq Letter, supra note 71, at 9; HRT 
Letter, supra note 92, at 4; SIFMA Letter, supra note 96, at 3; and 
IMC Letter, supra note 96, at 2.
    \122\ See, e.g., SIFMA Letter, supra note 96, at 3; Citadel 
First Letter, supra note 31, at 7; DLA Piper Letter, supra note 98, 
at 4; Letter from Kristen Malinconico, US Chamber of Commerce, 
Center for Capital Markets Competitiveness, dated April 23, 2020, at 
1; Letter from John L. Thornton, Co-Chair, Hal S. Scott, President, 
and R. Glenn Hubbard, Co-Chair, Committee on Capital Markets 
Regulation, dated April 23, 2020, at 1-2 (``Committee on Capital 
Market Regulation Letter''); Bacidore Letter, supra note 71, at 2; 
First FIA PTG Letter, supra note 86, at 7; HRT Letter, supra note 
92, at 4; First Nasdaq Letter, supra note 71, at 10-11. Another 
commenter argues that ``the combination of the `Discretionary Limit' 
order type and the IEX speed bump will impair fair and efficient 
access to IEX displayed quotes, meaning that the intentional access 
delay can no longer be considered de minimis under the Commission's 
Automated Quotations Interpretive Guidance in the context of this 
specific order type. Therefore, displayed quotes using the 
`Discretionary Limit' order type will not qualify as `automated 
quotations' for purposes of Rule 611.'' See First FIA PTG Letter, 
supra note 86, at 6-7. See also HRT Letter, supra note 92, at 2-3; 
DLA Piper Letter supra note 98, at 4-5.
---------------------------------------------------------------------------

    Other commenters disagree and argue that D-Limit orders would 
qualify as protected quotations under Regulation NMS. For example, one 
commenter notes that the Commission, when it approved IEX's exchange 
registration, already concluded that IEX is an automated trading center 
with protected quotations.\123\ The commenter asserts that ``[t]he 
introduction of the D-Limit Order does not alter that analysis'' and 
that``[t]here is no delay embedded within D-Limit Orders.'' \124\ The 
commenter concludes that ``D-Limit Orders are no different'' and ``are 
as accessible as any other quote.'' \125\
---------------------------------------------------------------------------

    \123\ See Goldman Sachs Letter, supra note 60, at 2.
    \124\ Id.
    \125\ Id. See also IEX Second Response to Comments, supra note 
38, at 10.
---------------------------------------------------------------------------

    The Commission previously determined that IEX can maintain a 
protected quotation when it approved IEX's exchange registration.\126\ 
Because IEX is not introducing any new delay or modifying its speed 
bump in connection with D-Limit orders, IEX's quote can continue to be 
an ``automated quotation'' that is ``protected'' under Rule 611 even if 
it contains a D-Limit order.\127\
---------------------------------------------------------------------------

    \126\ See Securities Exchange Act Release No 78102, (June 17, 
2016), 81 FR 40785, 41162 (June 23, 2016) (File No. S7-03-16). See 
also Securities Exchange Act Release No. 78102 (June 17, 2016) (File 
No. S7-03-16) (Commission Interpretation Regarding Automated 
Quotations Under Regulation NMS). See also 17 CFR 242.600(b)(4) 
(defining ``automated quotations'').
    \127\ See also supra Section III.A (discussing the CQI).
---------------------------------------------------------------------------

D. Unfair Discrimination

    Section 6(b)(5) of the Exchange Act requires, among other things, 
that rules of the Exchange may not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\128\ 
Several commenters argue that the D-Limit order type will unfairly 
discriminate against liquidity takers in favor of liquidity providers. 
One commenter asserts that D-Limit orders are ``specifically designed 
to advantage liquidity providers, and to allow them to avoid 
unfavorable executions,'' but ``displayed quotations on IEX will be 
more difficult to access for liquidity takers when the market is moving 
in their favor'' to the extent that IEX's quote is composed of D-Limit 
orders that get repriced.\129\ Another commenter similarly believes 
that D-Limit orders will unfairly discriminate against liquidity 
takers, ``particularly for orders that are sent to more than one venue 
for execution, such as intermarket sweep orders,'' if market 
participants need to modify their routing practices.\130\
---------------------------------------------------------------------------

    \128\ 15 U.S.C. 78f(b)(5).
    \129\ First FIA PTG Letter, supra note 86, at 4. See also First 
Nasdaq Letter, supra note 71, at 7; DLA Piper Letter, supra note 98, 
at 6. Another commenter believes that D-Limit orders will 
discriminate between fast and slow liquidity takers, and says that 
liquidity takers that do not engage in latency arbitrage will be 
forced to protect against financial harm from the D-Limit 
functionality by building technology to mimic or predict the CQI 
functionality. See DLA Piper Letter, supra note 98, at 6. The 
commenter argues that doing so would be ``a prohibitively expensive 
option for many of them and completely impractical if other markets 
adopted similar rules.'' Id. As further explained below, the 
repricing of D-limit orders will be applied only in rare and 
discrete moments of time when the CQI is triggered, which 
significantly reduces the possibility of D-Limit being applied to 
the detriment of liquidity takers not engaged in latency arbitrage 
strategies. Furthermore, as noted above, several commenters who 
engage in liquidity-taking trading activity--but do not employ 
latency arbitrage--state that they have been harmed by latency-
arbitrage strategies, and do not believe the CQI will inhibit their 
ability to access IEX's quote. See supra notes 103-104.
    \130\ Citadel First Letter, supra note 31, at 7-8.
---------------------------------------------------------------------------

    One commenter critiques IEX's argument that the CQI is ``on'' only 
for a limited duration by referring to IEX's data that shows ``a very 
significant portion of total trading activity will be affected, as 
33.7% of marketable orders are received and 24% of displayed volume is 
executed during these periods.'' \131\ Similarly, another commenter 
points to commentary from an IEX officer saying that ``[i]n November 
2019, just 3 member firms at IEX were responsible for 55% of all the 
lit taking volume while the [CQI] Signal was `on,' even though those 
firms accounted for only 13% of the total volume on IEX.'' \132\ The 
commenter asserts that ``[b]ased upon such statistics, the Commission 
should consider whether latency arbitrage on

[[Page 54448]]

IEX is actually the serious and widespread problem that IEX asserts it 
to be'' and urges the Commission to ``consider whether it would be fair 
for IEX to discriminate against 45% of its lit taking volume to address 
a perceived problem with only three firms.'' \133\
---------------------------------------------------------------------------

    \131\ Id. at 7.
    \132\ First Nasdaq Letter, supra note 71, at 7.
    \133\ Id. IEX responds by suggesting that the commenter 
``misread[s]'' that data and asserts that ``aggressive taking orders 
while the CQI is on are strongly correlated to latency arbitrage 
strategies, not just those from the top three takers.'' IEX First 
Response to Comments, supra note 7, at 14. As discussed above, the 
Commission concludes that latency arbitrage is occurring on IEX and 
it is a problem for liquidity providers on IEX. As further discussed 
above, the Commission concludes that IEX's D-Limit proposal 
appropriately balances competition among orders and the interests of 
long term and short term traders in a manner that meets the needs of 
long term investors through a narrowly tailored order type that will 
promote liquidity for all market participants.
---------------------------------------------------------------------------

    Other commenters believe that D-Limit orders will not be unfairly 
discriminatory. For example, one commenter believes that D-Limit orders 
will ``equally benefit long-term investors, their brokers, and market 
makers alike'' and notes that ``[a]ny market participant can use D-
Limit, regardless of their sophistication or technological capability, 
and any speed or information advantage they may or may not have.'' 
\134\ Another commenter explains that D-Limit will ``provide any Member 
with narrowly targeted protection . . . but without the need for the 
Member to have any geographical or informational advantages or its own 
predictive analytical capabilities.'' \135\ Some commenters suggest 
that the D-Limit order type will benefit all market participants in 
that it has the potential to increase the depth of displayed liquidity 
and narrow spreads in some stocks,\136\ contribute to price 
discovery,\137\ and encourage more market participants, particularly 
long term investors, to submit displayed liquidity on IEX.\138\
---------------------------------------------------------------------------

    \134\ T. Rowe Price Letter, supra note 59, at 2. See also CII 
Letter, supra note 60, at 2; The London Company Letter, supra note 
101, at 2; Joint Letter from 27 Asset Managers, supra note 58, at 2; 
Vanguard Letter, supra note 65, at 3.
    \135\ Letter from Tyler Gellasch, Executive Director, Healthy 
Markets Transparency and Trust, dated February 14, 2020, at 7-8 
(``Healthy Markets First Letter''). See also Leuchtkafer Letter, 
supra note 95, at 2-3.
    \136\ See, e.g., Letter from Thomas M. Merritt, Deputy General 
Counsel, Virtu Financial, LLC, dated January 16, 2020, at 2; and 
Letter from Eric Swanson, CEO, XTX Markets LLC (Americas), dated 
January 17, 2020, at 5.
    \137\ See, e.g., Letter from Peter D. Stutsman, Global Head of 
Equity Trading, Capital Group, dated March 16, 2020, at 2; Letter 
from Curtis F. Bradbury, Chief Operating Officer, Stephens Inc., 
dated February 28, 2020, at 2; and Letter from David Cannizzo, 
Managing Director, Head of Electronic Trading & Market Structure, 
and Rich Delayo, Director, Electronic Trading & Market Structure, 
Raymond James & Associates, Inc., dated February 24, 2020 (``Raymond 
James Letter''), at 2; Allianz Letter, supra note 59.
    \138\ See, e.g., Joint Letter from 27 Asset Managers, supra note 
58; Clearpool Letter, supra note 61, at 2; Themis Letter, supra note 
63, at 3; CII Letter, supra note 60, at 4; Zoican Letter, supra note 
60, at 2; and Vanguard Letter, supra note 65, at 2.
---------------------------------------------------------------------------

    In response to these comments, IEX agrees that the D-Limit order 
type will benefit liquidity providers ``by protecting their orders 
during discrete moments when latency arbitrage strategies are most 
aggressive'' but argues that such benefit is not unfair because, in 
turn, liquidity takers will benefit from ``an increased supply of 
liquidity from a more diverse group of participants'' and will attract 
``more stable liquidity that is not driven by sub-millisecond price 
moves, whether they are `making' or `taking' liquidity.'' \139\ IEX 
emphasizes that the D-Limit order type ``is not intended to ensure that 
trades are profitable'' but rather is designed to promote displayed 
liquidity.\140\
---------------------------------------------------------------------------

    \139\ IEX Second Response to Comments, supra note 38, at 20. See 
also Allianz Letter, supra note 59 (asserting that latency arbitrage 
``hurts the interests of our clients and the performance of their 
investments'' not just when they post liquidity but also when they 
take liquidity because they ``have to pay more (when buying) or sell 
for less as there is less displayed liquidity at the best bid and 
offer prices'').
    \140\ IEX Second Response to Comments, supra note 38, at 20. IEX 
also notes that ``there are trade-offs between using D-Limit, as 
opposed to a pegged or standard limit order, including in cases 
where a firm's priority is obtaining a faster execution rather than 
avoiding adverse selection.'' Id. at 21. Further, IEX asserts that 
``unlike the `asymmetric advantages' that other exchanges routinely 
sell today (different connectivity, market data, trading protocols) 
for millions of dollars, IEX is offering D-Limit to all of its 
members equally and at no additional cost compared to any other 
limit order.'' Id. at 5.
---------------------------------------------------------------------------

    IEX's proposal identifies a legitimate disadvantage in latency 
arbitrage, which many market participants say they face when posting 
displayed liquidity on exchanges. As further explained above, the 
proposed D-Limit order type (operating in conjunction with the CQI) is 
designed to operate in a manner that protects investors and the public 
interest because it is narrowly tailored to address this concern.\141\ 
Additionally, a large number of market participants (including a 
diverse group of agency brokers, institutional traders, asset managers, 
and pension funds that collectively manage trillions of dollars' worth 
of investor assets) commented on this proposal to confirm that 
aggressive liquidity taking activity during CQI events is of such 
concern and impact on them, and the investors on whose behalf they 
invest, that it affects their trading and can dissuade them from 
posting liquidity.
---------------------------------------------------------------------------

    \141\ See supra Section III.A.
---------------------------------------------------------------------------

    The Commission has critically reviewed and considered the data and 
analysis that IEX provides in its submissions to show that non-pegged 
limit orders on IEX are systematically subjected to adverse impacts of 
latency arbitrage strategies. IEX has provided extensive information in 
its filing and the letters it submitted in response to comments. 
Further, because the CQI formula is codified in IEX's rulebook, it is 
fully transparent and commenters had the opportunity not only to review 
IEX's material and critique it, but to submit their own trading data 
and analysis to the Commission on the existence of latency arbitrage, 
the effectiveness of the CQI in detecting it, and the efficacy of IEX's 
discretionary order types in combating it, though no commenter did so.
    IEX's receipt of a significant percentage of marketable orders in a 
short period of time during crumbling quote events negatively affects 
market participants that post displayed liquidity on IEX. As discussed 
above, IEX states that though the CQI was, on average, on for only 
0.007% of the trading day for each security, IEX received 33.7% of 
marketable orders and executed 24% of displayed volume during this 
short time period.\142\ Subsequently, during the very volatile period 
of January to April 2020, IEX reports that the CQI was on between 
0.026% (for January 2020) and 0.125% (for March 2020) of the time 
during regular market hours \143\ and the percent of displayed volume 
that traded when the CQI was ``on'' during that period ranged between 
22% (for March 2020) to 24.4% (for January 2020).\144\ The displayed 
volume figures reflect the fact that relatively little of IEX's overall 
transaction volume currently involves the execution of displayed 
orders.\145\ The effects of latency arbitrage therefore appear more 
pronounced for liquidity providers that display interest on IEX. 
Further, IEX has shown that the CQI performs consistently over calm 
markets and periods of more volatile trading, so

[[Page 54449]]

its application to D-Limit orders is well understood.
---------------------------------------------------------------------------

    \142\ See id. at 72001-02.
    \143\ See IEX Second Response to Comments, supra note 38, at 16. 
IEX states that the CQI was ``on'' longer in March 2020 ``because of 
the extraordinary increase in the number of quote changes per stock 
in that month.'' Id. at 17.
    \144\ See id. IEX observes that this proportion remained 
``remarkably consistent throughout the period'' even though the 
absolute number of trades was much higher in March and April. See 
id.
    \145\ IEX states in its filing that only 13% of traded volume 
was from displayed limit orders. See Notice, supra note 3, at 72002.
---------------------------------------------------------------------------

    Based on the Commission's understanding of broker-dealers, as also 
reflected in the comment letters from institutional traders, most 
broker-dealers have not purchased the fastest connectivity and market 
data from multiple individual exchanges that are necessary to be able 
to trade at the precise moments in time identified by the CQI. In the 
race to access a ``stale'' quote, speed is paramount, and the systems, 
connectivity, and data needed to achieve the necessary speed to take 
advantage of the information asymmetries that underlie latency 
arbitrage are expensive and uncommon among broker-dealers.
    The CQI formula, by design, identifies only successively crumbling 
markets. As shown by the data above, it is not overbroad and does not, 
for example, turn on in response to intermarket sweeps from large 
orders that execute simultaneously across multiple markets. Thus, D-
Limit orders will not reprice in response to normal market conditions 
and regular liquidity sweeps, and thus will not harm long-term 
investors who take liquidity. Rather, the unique crumbling market 
conditions that the CQI identifies are rare, and can only be recognized 
and acted on by the most sophisticated broker-dealers whose ability to 
profit from these moments comes at the expense of the institutional 
investors who do not or cannot reasonably compete. IEX has proposed an 
order type to offset the speed advantage that some traders have in a 
manner that is not overbroad in its application.\146\
---------------------------------------------------------------------------

    \146\ See supra Section III.A.
---------------------------------------------------------------------------

    Accordingly, the Commission concludes that IEX has identified and 
quantified a latency arbitrage concern that adversely impacts a diverse 
set of participants on its exchange, many of which are sophisticated 
about market structure and have commented on how they have seen first-
hand the impact as they trade in the markets on behalf of others, 
including public investors. In addressing the adverse impacts of 
latency arbitrage, the Commission acknowledges that D-Limit orders will 
provide a benefit to liquidity providers but not liquidity takers, and 
will negatively impact liquidity takers that employ latency arbitrage 
strategies. For the reasons discussed below, the Commission finds that 
neither the benefit provided to liquidity providers nor the negative 
effects on liquidity takers employing certain strategies is unfairly 
discriminatory under the Exchange Act.
    IEX has narrowly tailored the functionality of D-Limit orders to 
address a very specific trading dynamic that takes place during an 
exceptionally small fraction of the trading day (for any one CQI event 
and collectively for all CQI events across different types of stocks 
and under different market conditions). Disparate capabilities with 
respect to systems, connectivity, and market data between liquidity 
providers and liquidity takers using latency arbitrage strategies 
disadvantage the ability of liquidity providers to update potentially 
stale quotes. While displayed D-Limit orders may impact a large number 
of marketable orders that seek to access a stale D-Limit quote 
precisely when IEX is in the process of repricing it, that is the 
specific harm against which IEX is seeking to protect liquidity 
providers--the combination of a large number of marketable orders all 
collectively targeting those infrequently occurring precise moments 
when disparate access to low-latency systems, connectivity, and data 
sources favors a few short term traders at the expense of long term 
traders.\147\
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    \147\ In addition, non-displayed D-Limit orders will not affect 
liquidity takers that cannot see non-displayed orders and thus would 
not purposefully and knowingly route to IEX to trade with them.
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    IEX's D-Limit order attempts to address that advantage through a 
narrowly tailored order type that carries out the liquidity provider's 
instructions by exercising discretion infrequently to update the D-
Limit order's limit price using predetermined, transparent, and rule-
based automated standards.\148\ Further, IEX will allow all traders to 
use D-Limit orders on the same terms and without additional charge to 
protect their limit orders from targeted latency arbitrage. D-Limit 
orders consequently have the potential to encourage more types of 
market participants to post more displayed liquidity on an exchange, 
and may contribute to price discovery and displayed depth to the 
benefit of all market participants.
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    \148\ As discussed above, IEX's rules set forth the precise 
predetermined mathematical formula that IEX uses to determine 
whether a ``crumbling quote'' situation exists and the D-Limit order 
abides by those rules based on system logic in an entirely automated 
manner. Neither IEX nor the member submitting the order has any 
actual discretion or ability to exercise individualized judgment 
when using a D-Limit order. When the CQI is off (on average 
approximately 99% of the regular trading day), a D-Limit order will 
behave like any other limit order. When the CQI is on, IEX will only 
reprice the specific side (bid or offer) at issue and will only move 
the price to a less aggressive price that is only one MPV away 
(lower for a bid or higher for an offer) from the CQI price and IEX 
will not provide the user with any optionality to do otherwise. 
Further, when a D-Limit order reprices, it will receive a new 
timestamp, and thus will not receive any priority advantage over 
other orders.
---------------------------------------------------------------------------

    Thus, the proposal is not unfairly discriminatory because it makes 
available a benefit that any liquidity provider can readily access and 
provides a narrowly focused protection that is calibrated to impact 
only the small number of liquidity takers that engage in latency 
arbitrage in order to incentivize liquidity providers to post orders 
for the benefit of all market participants. While protecting against 
latency arbitrage with this order type will affect a large number of 
marketable orders received in small increments of time, those orders 
dissuade many liquidity providers from posting limit orders on 
exchanges. Consequently, D-Limit orders should benefit all market 
participants by incentivizing more firms to post limit orders and 
thereby contribute to liquidity that all market participants can 
access. Finally, as discussed above, D-Limit orders will encourage long 
term investors to participate in the displayed exchange market by 
protecting them against one particular strategy employed by short term 
traders. It is not unfairly discriminatory for an exchange to address 
that advantage in a narrowly tailored manner that promotes investor 
protection and the public interest. Accordingly, the Commission 
concludes that IEX's proposal is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
    The Commission is mindful that, in considering the IEX proposal, 
some commenters compare it to a recent proposal from CboeEDGA to adopt 
an access delay of up to 4 milliseconds for all liquidity taking orders 
during which liquidity providers could continue to access their orders 
without delay.\149\ One commenter states that IEX's D-Limit proposal is 
similar to the CboeEDGA proposal in that liquidity takers would be 
disadvantaged in favor of liquidity providers, and liquidity providers 
on the host exchange could be advantaged vis-[agrave]-vis liquidity 
providers on other exchanges that do not offer similar 
protections.\150\ One commenter questions the data provided by both 
exchanges as to the existence of a problem, its purported impact, or 
the

[[Page 54450]]

benefits of the proposed solution.\151\ The commenter also questions 
why IEX is providing a benefit ``to sophisticated proprietary trading 
firms acting as liquidity providers without a corresponding 
obligation.'' As noted above, any user will be able to submit D-Limit 
orders.\152\ Two other commenters assert that the concerns raised about 
the CboeEDGA proposal are similar to the concerns that these commenters 
raise for this proposal, notably the quote fading, unfair 
discrimination, burden on competition, and narrowly tailored concerns 
discussed above.\153\
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    \149\ See Securities Exchange Act Release No. 88261 (Feb. 21, 
2020), 85 FR 11426 (Feb, 27, 2020) (CboeEDGA-2019-012) (order 
disapproving proposed rule change to introduce a liquidity provider 
delay mechanism) (``CboeEDGA Order'').
    \150\ See First FIA PTG Letter, supra note 86, at 4. See also 
IMC Letter, supra note 96, at 2 and Letter from Joanna Mallers, 
Secretary, FIA Principal Traders Group, dated April 23, 2020, at 1 
(``Second FIA PTG Letter''). The Commission addresses concerns about 
competitive disadvantages in the next section.
    \151\ See Citadel First Letter, supra note at 31, at 5-6. The 
commenter further states that a D-Limit order will ``lose much of 
its value if IEX is alone at the NBBO and therefore routed to first, 
as the CQI signal will not provide added protection in this 
situation'' and therefore may ``not generally be expected to narrow 
prevailing market-wide spreads.'' Id. at 6. As the Commission 
discusses above, D-Limit orders are intended to incentivize 
investors to display limit orders in general and at any price. Even 
if D-Limit orders are not used to narrow the best displayed quotes, 
to the extent they add displayed liquidity at the best displayed 
quotes liquidity takers would still benefit as they would have 
access to more liquidity at the best prices.
    \152\ See Citadel First Letter, supra note at 31, at 9. The 
consideration of benefits provided to registered market makers in 
return for obligations to the market recognizes that market makers 
are typically afforded special privileges by exchanges, including 
preferential priority and margin treatment, in return for their 
undertaking quoting and other obligations. D-Limit orders will be 
available for use by any market participant and will not entitle the 
user to any additional benefits.
    \153\ See First Nasdaq Letter, supra note 71, at 11; Citadel 
First Letter, supra note at 31, at 2. See also HRT Letter, supra 
note 92, at 3; Committee on Capital Market Regulation Letter, supra 
note 122, at 2. Cf. SIFMA Letter, supra note 96, at 3.
---------------------------------------------------------------------------

    Another commenter notes that, unlike CboeEDGA's proposal, the D-
Limit order will not provide market participants with an ``option'' to 
change their order but rather will reprice 100% of the time when the 
CQI triggers, which process is both ``transparent and certain.'' \154\
---------------------------------------------------------------------------

    \154\ Healthy Markets First Letter, supra note 135, at 2. See 
also T. Rowe Letter, supra note 59, at 2.
---------------------------------------------------------------------------

    Another commenter that opposed CboeEDGA's proposal and supports 
IEX's proposal distinguishes the two proposals by explaining that D-
Limit is ``non-discriminatory'' in that any market participant can use 
it without ``technological investment that is generally outside the 
reach for most institutional investors and their brokers.'' \155\ The 
commenter also explains that IEX's proposal is ``deterministic and 
transparent'' and presents less of a quote fading concern for 
institutional investors since the CQI is narrowly tailored.\156\
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    \155\ T. Rowe Letter, supra note 59, at 2.
    \156\ See id.
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    The two proposals differ substantially.\157\ Specifically, IEX, 
unlike CboeEDGA, presented substantial evidence of latency arbitrage 
occurring on its market and has narrowly tailored D-Limit orders to 
specifically protect against it. In the CboeEDGA disapproval order, the 
Commission stated that CboeEDGA did not ``provide specific analysis as 
to why it is appropriate to apply the 4 millisecond delay to all 
incoming executable orders that would remove liquidity from the EDGA 
Book from all market participants as opposed to tailoring a response to 
target the trading of a relatively small number of market participants 
who engage in latency arbitrage.'' \158\ Second, CboeEDGA did not 
address the impact on relatively slower liquidity providers, who might 
be unable to cancel or modify their quotes during the 4 millisecond 
delay and thus ``would continue to face the risk of adverse selection'' 
and would be unable to benefit from the CboeEDGA delay.\159\ Finally, 
CboeEDGA did not ``provide[] specific analysis or demonstrate[] that 
the proposed rule change would not permit unfair discrimination against 
liquidity taking orders that are not related to latency arbitrage as 
they would be treated in the same manner as orders engaged in latency 
arbitrage that the Exchange seeks to target in its effort to protect 
EDGA liquidity providers.'' \160\
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    \157\ The CboeEDGA proposal would have broadly imposed a non-
tailored access delay constantly and consistently during trading 
hours to all liquidity taking messages, but liquidity providers 
would have been able to access their displayed orders (e.g., to 
change or cancel them) without being subject to the delay.
    \158\ CboeEDGA Order, supra note 149, at 11436.
    \159\ Id. at 11436.
    \160\ Id. at 11435.
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    In contrast, as further explained above, IEX provides data and 
analysis that demonstrate a harm caused by latency arbitrage strategies 
employed by liquidity takers with significant technological advantages 
over liquidity providers and those liquidity takers that do not engage 
in latency arbitrage trading strategies.\161\ Because IEX will reprice 
all D-Limit orders without further action from the user, all users will 
benefit equally regardless of their technological capabilities and 
ability to take action within a prescribed period. Likewise, D-Limit 
orders will be repriced only in rare and discrete moments of time when 
the CQI is triggered, which would significantly reduce the possibility 
of D-Limit being applied to the detriment of liquidity takers not 
engaged in latency arbitrage strategies. Thus, IEX's D-Limit proposal 
does not raise the same issues as those raised by the CboeEDGA proposal 
because D-Limit is narrowly tailored to be triggered only at precise 
and specific moments in time during which resting orders may be exposed 
specifically to latency arbitrage.\162\
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    \161\ See supra note 40 and accompanying text and Section II.A.
    \162\ See also IEX First Response to Comments, supra note 7, at 
7-9; Clearpool Letter, supra note 61, at 2-3; and Healthy Markets 
First Letter, supra note 135 (each contrasting D-Limit with the 
CboeEDGA proposal).
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E. Burden on Competition

    Finally, the Exchange's proposal is consistent with Section 6(b)(8) 
of the Exchange Act,\163\ which requires that the rules of a national 
securities exchange not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Several commenters question whether D-Limit orders will impose a 
burden on competition that is inconsistent with the Exchange Act.\164\ 
One commenter argues that D-Limit orders ``are designed to take 
advantage of the fact that other market participants are subject to the 
IEX speed bump when updating prices, whereas D-Limit orders are not.'' 
\165\ Another commenter claims that the D-Limit order type ``advantages 
liquidity providers on IEX over liquidity providers on other venues, as 
IEX liquidity providers can free-ride on the pricing heuristics and 
risk taking capabilities of others by posting prices equal to the NBBO 
and relying on IEX to observe away executions and reprice D-Limit 
orders to frequently avoid unfavorable executions.'' \166\
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    \163\ 15 U.S.C. 78f(b)(8).
    \164\ See 15 U.S.C. 78f(b)(8) (requiring that the rules of a 
national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes 
of the Exchange Act).
    \165\ See HRT Letter, supra note 92, at 3. The commenter stated 
that ``[e]xchanges should not have the ability to make investment 
pricing decisions such as pricing orders using price predictions'' 
and argues that the resulting ``competition will not be on fair 
terms as exchanges have inherently better access to the matching 
engine . . . .'' Id. at 2.
    \166\ Citadel First Letter, supra note 31, at 10. See also First 
FIA PTG Letter, supra note 86, at 4.
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    Other commenters that support the proposal say it is a narrowly 
tailored competitive response that facilitates the ability of natural 
liquidity providers to protect themselves from microsecond liquidity 
arbitrage, and therefore it furthers competition.\167\ For example,

[[Page 54451]]

one commenter believes that ``the D-Limit order type is pro-
competitive'' because it offers market participants that do not buy the 
fastest market data ``a potential way to mitigate the risk of posting 
liquidity without participating in a costly high-speed race to minimize 
latency.'' \168\
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    \167\ See, e.g., Allianz Letter, supra note 59. But see Letter 
from Joan C. Conley, Senior Vice President & Corporate Secretary, 
Nasdaq, Inc., dated March 26, 2020, at 2 (``Some broker-dealers 
choose to compete with proprietary trading firms, and purchase data 
and connectivity products that allow them to do so, while others 
choose not to do so.'').
    \168\ Vanguard Letter, supra note 65, at 3 (further noting that 
``[o]rganizations that do not pay for data products that provide 
unparalleled speed advantages are discouraged from posting liquidity 
on exchanges because they may receive unfavorable executions''). See 
also Allianz Letter, supra note 59; Raymond James Letter, supra note 
137.
---------------------------------------------------------------------------

    In response to the comments, IEX asserts that ``[t]he asymmetry 
involved in the latency arbitrage strategies that are the focus of D-
Limit favors the few participants that can take liquidity using the 
most sophisticated tools, in contrast to both market makers and brokers 
acting for investors that provide liquidity by posting displayed 
quotes.'' \169\ In particular, IEX argues that brokers representing 
investors ``must cope with the latency caused by geographic dispersion 
of exchanges, the additional latency caused by systems configurations 
required to comply with regulatory and risk parameters in their 
capacity as agent, and the need to route orders in different ways to 
meet the needs of their various clients'' and, as a result, they are 
``destined to lose out to firms that can prioritize speed over all 
other factors.'' \170\ IEX concludes that the resulting ``imbalance in 
market competition between those who provide liquidity, versus those 
who take it, necessarily reduces the incentives to provide displayed 
quotes and therefore reduces liquidity available to investors.'' \171\ 
Further, IEX argues that because every D-Limit order will ``be required 
to specify a limit price, which may or may not be equal to the NBBO,'' 
these orders should ``contribute meaningfully to price discovery, as 
commenters have stated.'' \172\
---------------------------------------------------------------------------

    \169\ IEX First Response to Comments, supra note 7, at 3.
    \170\ Id.
    \171\ Id.
    \172\ IEX Second Response to Comments, supra note 38, at 21.
---------------------------------------------------------------------------

    As discussed at length above, the D-Limit order type is narrowly 
tailored to accomplish its objectives by mitigating the effects of 
latency arbitrage for long-term investors while incentivizing more 
displayed liquidity on the Exchange. Presently, as noted by several 
commenters with institutional trading experience, many market 
participants are reluctant to post displayed liquidity because of their 
prior experience with having that interest be adversely selected by 
latency arbitrage traders with whom they cannot reasonably 
compete.\173\ To take advantage of their low-latency systems and 
technology, latency arbitrage traders purchase connectivity and 
proprietary market data from exchanges, which they utilize to react 
faster to changing market prices than other market participants. Those 
other market participants might not be able to afford those same low-
latency systems, or purchase high-end connectivity and market data from 
multiple individual exchanges to protect themselves. The resulting 
competitive imbalance between latency arbitrage traders and others can 
make those other market participants reluctant to post displayed limit 
orders on exchanges. The lack of displayed liquidity can, in turn, harm 
price discovery and lead to greater off-exchange trading, which can 
negatively impact markets and market participants. Exchanges should be 
able to innovate to address this competitive imbalance in a manner that 
is consistent with the Exchange Act.
---------------------------------------------------------------------------

    \173\ See supra note 116 and accompanying text.
---------------------------------------------------------------------------

    IEX's proposal seeks to better balance the interests of liquidity 
providers and long-term investors seeking liquidity with those of 
short-term investors utilizing latency arbitrage strategies. The D-
Limit functionality will help mitigate the effects of latency arbitrage 
on liquidity providers and, as explained above, will likely lead to 
more displayed liquidity on the Exchange, which benefits all market 
participants through additional liquidity and enhanced public price 
discovery.\174\ Further, because it is so narrowly tailored, liquidity 
takers who are not employing latency arbitrage strategies are unlikely 
to be seeking to remove a D-Limit order when it is being repriced, and 
thus D-Limit orders will not impose a burden on liquidity.
---------------------------------------------------------------------------

    \174\ See supra Section III.A.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that D-Limit orders will not 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The D-Limit order 
type is IEX's competitive response to mitigate current competitive 
imbalances between liquidity providers and latency arbitrage liquidity 
takers. It is designed to encourage market participants to post more 
priced limit orders, including displayed orders, on IEX, and thereby 
promotes just and equitable principles of trade, removes impediments to 
and perfects the mechanism of a free and open market and a national 
market, and, in general, protects investors and the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\175\ that the proposed rule change (SR-IEX-2019-15) be, 
and it hereby is, approved.
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    \175\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-19204 Filed 8-31-20; 8:45 am]
BILLING CODE 8011-01-P


